Tech Differences May Create Speed Bump in Truck Merger

Freight truckers Yellow and Roadway merged without scrapping any customer systems or facilities. But now they want to integrate USF. That may be a rough ride.

The trucking company known simply as Yellow saved $100 million and boosted its operating profits from 2.8 cents on the dollar to 5.3 cents, in the first year after it merged with rival Roadway. It didn't eliminate computing systems that helped it deal with customers, and it didn't shutter facilities.

Can it replicate this success now that the company, renamed Yellow Roadway, is merging with another billion-dollar rival, the USF Corp.?

Maybe.

"Yellow gained a lot of experience with the Roadway acquisition, but USF is an entirely different business that's decentralized," says Chris Brady, president of Commercial Motor Vehicle Consulting, a Manhasset, N.Y.-based consulting firm. "The integration could be more difficult."

Where Yellow absorbed one set of financial and freight-tracking systems from Roadway, this time Yellow Roadway inherits an organization that acts as seven regional companies, with different sets of business systems at units ranging from USF Holland to USF Reddaway to USF Logistics Services. USF interim CEO Thomas Bergmann noted on a March 8 conference call that a new freight management system is being rolled out to its operations on the West Coast, but not elsewhere.

"Because of USF 's seven divisions, Yellow won't have one place to get savings," says JP Morgan Securities analyst Gregory Burns. "Yellow will have to hunt in more places to get those cost savings."

The big difference between USF and Roadway is the distance their trucks travel. Roadway, like Yellow, was a national carrier. USF focuses on smaller loads and short, irregular routes that make centralized processes such as freight management and route optimization more difficult.

Yellow Roadway's chore will be to combine systems where it can and live with disparate systems at USF divisions. Yellow Roadway CEO William Zollars says the company plans to "develop technology once and use it multiple times," but acknowledges other technology pieces "will be unique to USF."

Zollars is projecting $150 million in cost savings from the USF acquisition, with $40 million in the first year. The savings are divided into three buckets: purchasing leverage; labor and consolidation of functions such as finance and human resources; and technology infrastructure. Zollars didn't detail specific technology savings, but did say Yellow Roadway will operate one data center. Currently, the company has centers in Akron, Ohio, and Kansas City, Kan. USF brings another in Grand Rapids, Mich.

At the same time, Yellow Roadway will have to ensure existing USF systems work well. In 2004, USF took a $3.8 million write-off for a technology project that was abandoned "due to software stability and performance issues realized at the conclusion of pilot tests."

One option for Yellow Roadway would be to finish the "five-year strategic systems" overhaul that USF began in 2001, with the hiring of chief information officer John A. Niemzyk.

To read about the technological advances that made Yellow pursue Roadway in the first place, check out:How Roadway Outmaneuvers Competition

Yellow Roadway's main goal is to not "touch off a trigger event,'' as Zollars put it in February at a Deutsche Bank investment conference, that would disrupt the information systems tracking the combined companies' trucks and their freight. The objective: Don't lose one customer over a systems hiccup.

Another strategy would be to cut off USF's human-resources, accounting and scheduling systems in favor of Yellow Roadway's back-office operations, Burns says. That approach, however, may be one of those high-risk maneuvers Zollars shuns in the first year of an acquisition.

Already, USF is struggling a bit. The company on April 7 said its first-quarter earnings would fall short of Wall Street expectations, prompting a statement from Yellow Roadway reaffirming its commitment to the acquisition.

For 2004, USF had net income of $23.8 million, down from $42.3 million in 2003. Revenue was up in 2004 to $2.4 billion, from $2.3 billion. Net income was 1% of revenue in 2004, compared to profits that were 1.9% of revenue in 2003. Yellow Roadway reported net income of $184 million, or 2.7% of revenue, on sales of $6.77 billion.

Meanwhile, Zollars is still integrating Roadway. The company says 2004 was spent on identifying best practices between the two firms. Zollars says network optimization and work on common technologies and maintenance equipment is next.

Zollars acknowledges the Roadway integration has gone "better than most expected," but reckons there's another $200 million in savings available. Toss in USF, and Yellow Roadway has a big load to haul.

Business Editorldignan@ziffdavisenterprise.comLarry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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